FCC 96-93
In the Matter of ) ) Federal-State Joint Board on ) CC Docket No. 96-45 Universal Service )
COMMENTS OF THE WESTERN ALLIANCE
The Western Alliance (the "Alliance") is a consortium of the Western Rural Telephone Association and the Rocky Mountain Telecommunications Association, representing approximately 300 exchange carriers serving the 23 states west of the Mississippi River and the island territories of the Pacific Rim. The Alliance's membership consists almost entirely of small carriers, many serving fewer than 1,000 customers dispersed over large, remote service areas. Of all the organizations filing comments in this proceeding, none is composed of members who will be more profoundly affected by the decisions made in this rulemaking.
The Alliance believes that the requirements of Section 254 of the Telecommunications Act of 1996 (the "1996 Act"),1 and the standards embodied in the Fifth Amendment to the U.S. Constitution, can be met only by a system of universal service supports based on actual costs of service. Doubtful substitutes for actual costs, such as proxy models and competitive bidding, risk noncompliance with the Act's requirements and confiscation of investment prudently made in rural infrastructure.
The Alliance also believes that the definition of universal service should facilitate access to modern telecommunications and information services at the lowest feasible cost to the system. Accordingly, the core universal service program should support single-party, touchtone service, including access to emergency and operator services; and should support access to advanced services through ISDN-like functionality, which can be offered without replacing existing copper facilities. The Commission also should support advanced services for schools, hospitals and libraries through a fund separate from the core program supporting basic services and infrastructure.
Finally, the Alliance believes that administration of the universal service fund should be entrusted to the entity best qualified, by experience and expertise, to manage the program fairly and efficiently. There is no reason not to retain the National Exchange Carrier Association ("NECA"), augmented with representatives of segments of the industry other than incumbent local carriers, to carry on this task.
I. Universal Service Supports Must Be Based On Actual, Reported Costs Of Service
The Notice of Proposed Rulemaking in this proceeding (the "NPRM") acknowledges that the FCC's universal service policies now are controlled by Section 254 of the 1996 Act, and asks how the specific goals of that Section can best be achieved.2 At the same time, however, the NPRM proposes possible approaches to universal service that cannot be squared with the new Act and may, in their application, raise serious constitutional concerns. These approaches should be rejected in favor of support mechanisms based on actual, reported costs of service.
A. The 1996 Act Requires A System Based On Actual Costs
The universal service provisions of the 1996 Act do not express a preference -- they impose an obligation. The Commission is to implement a "predictable," "sufficient" system designed to make "quality services . . . available at just, reasonable, and affordable rates,"3 and ensure that rural, insular and high-cost consumers have access to services that are reasonably comparable, in quality and cost, to those available in urban areas.4 The universal service requirements are not confined by the Act to residential ratepayers, and therefore continue to extend to single-line and multi-line businesses, as well. And while the Act gives the Joint Board and the Commission discretion to consider additional principles to be served by the universal service system,5 nowhere does the Act suggest that other policies -- such as competition and efficiency -- may be used to undermine or defeat the specific universal service goals set out in Section 254, or jeopardize the ability of eligible carriers to meet their obligations under revised Section 214.6 Whatever latitude the Commission may have had, under the Communications Act of ("1934 Act"), to put universal service at risk in the interest of deregulation and competition, that latitude now has been removed.
In its effort to make the universal service system consistent with the procompetitive purpose of the 1996 Act, therefore, the Commission must proceed carefully. So, for example, the NPRM's suggestion that universal service supports should be technology- and competitively-neutral is, if properly implemented, consistent with the goals of Section 254.7 The notion that actual costs might be replaced with proxies or competitive bidding, however, places the universal service goals of the Act at unacceptable risk for our customers and should not be adopted.
1. Proxies And Competitive Bidding Will Jeopardize The Statutory Goal Of Comparable Service For Rural And Urban Customers
Congress intends that all ratepayers, regardless of geographic location, will enjoy access to telecommunications services of reasonably comparable quality, at reasonably comparable rates. In high-cost areas of the country, this goal can only be met through a system that reliably recovers the difference between building and operating subscriber plant in high-cost areas, and building and operating subscriber plant in urban areas, from a source other than the rates charged to customers living in the high-cost areas. Only with a system of this kind (such as is achieved through the present combination of USF supports, dial equipment minutes ("DEM") weighting and long-term supports) can rural and high-cost telephone companies provide affordable service today and make the investment needed to modernize their networks and offer quality service in the future. Proxy models and competitive bidding fail to comply with the Act because they ensure that, for some percentage of rural and high-cost ratepayers, this goal will not be achieved.
The Commission's proposal to adopt a proxy model in place of actual costs, in fact, expressly contemplates this adverse result. As the Commission made clear in its 1995 notice of rulemaking on universal service,8 under a proxy system real-world investments and expenses that exceed the level set by the proxy model will be presumed to reflect imprudent or inefficient management decisions, and will not qualify for universal service support.9 The proxy model expressly uses the threat of this result -- with its negative effects on investors and ratepayers alike -- to encourage cost-cutting by recipients of USF supports.10
The flaws of this approach, at least as applied to small companies, have been extensively presented to the Commission. Commenters in last year's universal service comment cycle made substantial submissions pointing out that no proxy model will capture all of the significant factors that influence the level of prudent investment any particular small company will be required to make.11 Even if the use of universal service to enforce efficiency was a legitimate policy, therefore, that goal could not be achieved through proxies.
With the passage of the 1996 Act, the proxy approach becomes not only an inaccurate instrument, but an impermissible one. The Act does not say that rural and high-cost customers are entitled to services and rates comparable to those in urban areas, except where the investment made in order to serve them exceeds a threshold established by a proxy cost model.12 Because proxies inevitably will discourage investment in high-cost areas (eroding the quality of rural service) and will lower support to many high-cost customers (jeopardizing the requirement that urban and rural rates be reasonably comparable), proxy models may not be adopted consistent with Section 254 of the 1996 Act.
Competitive bidding, in which the low bidder would set the level of supports and receive a bonus for making the lowest bid, is an equally flawed approach. In the real world, an invitation to inexperienced companies to "bid" for the right to serve high-cost areas will result in unrealistically low bids, substandard infrastructure and abandonment of service. Experience with rural roads, sewer and water systems already demonstrates that competitive bidding for rural infrastructure is avoided by competent contractors. Often inferior workmanship and products are proposed in response to the bid; service and maintenance problems quickly appear with the incompetent winner of the bid, and these problems begin to drain local revenue sources.
Competitive bidding for the right to serve high-cost areas will harm, rather than help, the consumer. Unless low bidders can subsidize their rural services with revenues from more profitable operations (an approach that cannot be achieved in a competitive system), they will have no hope of offering service of comparable quality, and at comparable rates, to those provided to urban customers. Imprudent experiments of this kind cannot be reconciled with the intent of Congress.13
2. Erosion Of The Universal Service System Will Prevent Small Companies From Meeting Their Obligations As Eligible Telecommunications Carriers
The Alliance's member companies, along with other incumbent local exchange carriers, will be designated as "eligible telecommunications carriers" under the 1996 Act.14 Pursuant to this designation, those companies will be required to "offer the services that are supported under section 254(c) [of the 1996 Act] . . ."15 Neither the designation of these companies as eligible carriers, nor the obligations they will acquire because of that designation, will be a matter of choice. To the extent that non-cost based universal support approaches, such as proxies and competitive bidding, erode the ability of rural and high-cost carriers to meet their universal service obligations, therefore, those approaches will violate the intent and literal requirements of the eligible telecommunications carrier provisions of the Act.
3. Reductions In Support Will The Ability Of RUS Borrowers To Repay Their Loans
Many of the Alliance members have financed expansion and modernization of their networks through loans obtained from the Rural Utilities Service ("RUS").16 In assessing the ability of an RUS borrower to repay its loan and meet the stringent network modernization requirements imposed by the RUS program, the RUS relies on the totality of revenues and support flows available to the carrier -- including universal service supports, DEM weighting and long-term support. Significant reduction of the supports presently available through the USF, DEM weighting and long-term support programs, therefore, will jeopardize the ability of small carriers to repay, and otherwise meet their obligations under, their RUS loans. As supports are reduced, rural carriers will be forced to raise rates, and cut off service to their highest-cost customers, in order to meet their RUS obligations; and if (as seems likely) widespread RUS defaults nonetheless occur, the RUS program will become insolvent. Congress certainly does not intend these results.17
4. Proxies And Competitive Bidding Violate The Act's Requirement That The Universal Service Support Mechanism Be Predictable And Sufficient
The Act's requirement of quality, affordable service for rural and high-cost ratepayers is closely linked to the requirement that any universal service system be predictable and sufficient.18 Quality, affordable service requires substantial, ongoing investment that will not be made if telephone company managers and investors cannot predict, with reasonable assurance, that the investment will be recovered.
Proxies and competitive bidding fail to offer predictability and sufficiency. Both methods raise the likelihood that supports for individual high-cost companies will be insufficient, and competitive bidding, in particular, deprives telephone company managers and investors of the ability to predict the level of support that will be available. The volatility caused by proxies or competitive bidding, therefore, will risk a steady erosion of rural service and will violate the plain intent of Congress.
5. Changes To The Universal Service System Must Be Revenue-Neutral
While the Congress has called for a transition from implicit to explicit universal service supports, it has not called for a reduction in the overall level of support now provided through USF supports, DEM weighting and long-term support. In fact, the Congress has made it clear that supports are to be maintained at a level sufficient to ensure reasonable parity between rural and urban services.
In designing the transition to a system of explicit supports, the Commission should be aware that universal service supports in rural and high-cost areas are almost entirely explicit. Rural service areas offer few opportunities for urban-to-rural subsidies or business-to-residential subsidies; for the most part, universal service is maintained through the present, explicit methods of USF, DEM weighting and long-term support. Shortfalls caused by reductions in the explicit programs, therefore, cannot be made up through increases in implicit supports.
The Commission also should ensure that for some reasonable, transition period, the impact of changes to the universal service system is revenue-neutral. Rural companies accept that as competition enters their service areas, they will lose revenues and market share. They do not expect to be insulated from these normal effects of competition. At the same time, however, investment made during the previous, noncompetitive environment should not be confiscated. Accordingly, a transition period adequate to recover investments made prior to some date certain should be adopted. And in order to ensure the ability of rural, eligible telecommunications carriers to continue to meet their service obligations (including network modernization and the offering of new services), there will be a need for continuing, specific, predictable and sufficient support payments in the future.19
B. The Constitution Requires That If Universal Service Supports Are Reduced, Carriers Must Be Allowed A Reasonable Opportunity To Recover Investments Reasonably Made In Reliance On Past Support Levels
The U.S. Constitution does not guarantee any regulated entity a particular return on investment, nor does it shield investors from the ordinary risks of the marketplace. The Constitution does, however, prohibit regulations that effectively confiscate investment reasonably made in the enterprise without just compensation.20
Sudden, imprudent implementation of any system that results in a sharp reduction of universal service support will have precisely this impermissible effect. The investments by which rural telephone companies have brought their ratepayers one-party service, electronic switching, equal access and other modern services -- many of them pursuant to express regulatory mandates -- were made in reliance on a program of universal service support that enabled rural carriers to recover those investments without charging excessive rates to their customers. Without the assurance of universal service supports, the extension of those services to high-cost areas would not have been economically feasible.
If adequate universal service supports are hastily withdrawn and replaced by doubtful systems such as proxies and competitive bidding, a greater percentage of the high-cost carriers' embedded investment will have to be recovered from intrastate rates -- imposing, in effect, an unauthorized, unfunded mandate on the states. If state regulators are unwilling or unable to provide compensating intrastate supports, customers in high-cost areas will face drastic rate increases. If those increases are rejected by the state commissions, or if (as is equally probable) those increases result in massive discontinuance of service, then investment made in direct reliance on government policy will become forfeit.
Any proposals that risk drastic loss of present universal service supports, therefore, court the possibility of a taking of private property without just compensation, in violation of the Fifth Amendment to the U.S. Constitution. In order to prevent this result, any universal service rules that reduce supports substantially must establish an adequate, interim period during which high-cost carriers may reasonably have the ability to recover embedded investment.
II. Universal Service Should Be Defined To Include ISDN-Like Functionality
The NPRM also asks for comment on the appropriate definition of universal service, with particular reference to the Act's requirement that "[a]ccess to advanced telecommunications and information services should be provided in all regions of the Nation."21
The Alliance believes that the definition of universal service should provide for subscriber access to digital services, but that the definition cannot realistically include services or facilities that call for replacement of the present subscriber plant with new, broadband facilities. Given this constraint, the most cost-effective approach is to include ISDN-like functionality, provided over existing copper subscriber plant, in the definition of universal service. Deployment of these capabilities in rural areas should be encouraged, and making them a part of universal service will serve the intent of Congress in Section 254 of the Act.22
III. Advanced Services For Schools, Libraries And Health Care Facilities Should Be Separately Funded
Alliance agrees with the 1996 Act's objectives for support to schools, libraries and health care facilities.23 The levels of support needed to extend advanced services to these institutions, however, depend on the depth of the discount those institutions will require in order to pay for advanced services -- which depends, in turn, on the level of support our society provides to these institutions. Because the burden on the institutional fund cannot be anticipated, support for these institutions should not threaten the viability of, and therefore should not be part of, the fund applicable to the building and operation of core infrastructure.
IV. NECA Should Continue To Administer The High-Cost Fund
The NPRM asks commenters to suggest who should administer the universal service fund.24 In the Alliance's view, the most efficient approach is to appoint a single, nationwide administrator with large-scale information processing capability, experienced personnel, and demonstrated experience. The National Exchange Carrier Administration ("NECA") already meets these requirements, and has the unique advantage of administering the Interstate TRS Fund, which (like the fund required by the 1996 Act) includes participation by carriers of all types. Augmented, at the FCC's direction, by representatives of service providers other than incumbent LECs, NECA is unquestionably in the best position to administer universal service fairly, effectively, and with needed continuity between pre-Act and post-Act fund administration.
CONCLUSION
The 1996 Act confirms the commitment of Congress to the participation of all Americans in the benefits of evolving information technologies. A predictable, adequately funded universal service system, based on actual costs of service, will ensure that this congressional mandate is fulfilled.
Respectfully submitted,
By: ____________________________
Charles H. Kennedy
MORRISON & FOERSTER, LLP
2000 Pennsylvania Avenue, N.W.
Suite 5500
Washington, D.C. 20006
Telephone: (202) 887-1500
Attorneys for the Western Alliance
April 12, 1996
2 Federal-State Joint Board on Universal Service, CC Docket No. 96-45, Notice of Proposed Rulemaking and Order Establishing Joint Board, FCC No. 96-93 (Mar. 8, 1996), [[paragraph]][[paragraph]] 2-4.
3 1996 Act, supra at [[section]][[section]] 254(b)(5) and 254(b)(3).
4 Id. at [[section]] 254(b)(3). The NPRM also asks how the system can be designed to ensure that "[a]ccess to advanced telecommunications and information services [is] provided in all regions of the Nation." NPRM at [[paragraph]] 14; 1996 Act, supra at [[section]] 254(b)(2). We address this question at infra p. 12.
5 1996 Act, supra at [[section]] 254(b)(7).
6 Id. at [[section]] 102; see infra pp. 7-8.
7 The Alliance does not object, in principle, to extending universal service supports to all companies that accept genuine universal service obligations, regardless of technology. The Commission must ensure, however, that universal service supports available to the incumbent LECs continue to recognize, and permit recovery of, investment those companies have made in order to serve as carriers of last resort in a noncompetitive environment. Failure to take this investment into account would undermine universal service and threaten confiscation of reasonable investment made in reliance on the availability of adequate supports. See infra p. 11-12.
8 Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Board, Notice of Proposed Rulemaking and Notice of Inquiry, 10 FCC Rcd 12309 (1995) (hereinafter "1995 Rulemaking").
9 1995 Rulemaking, supra at [[paragraph]] 59.
10 "Finally, using proxy factors instead of reported costs would, unlike a methodology based on reported costs, encourage assistance recipients to control their costs, because the amount of assistance would not increase with increased expenditures." Id. Where adequate universal service supports are not forthcoming, of course, costs are shifted to the intrastate jurisdiction, effectively imposing an unfunded mandate on the states (a result clearly not intended by Congress). In states that lack large, low-cost urban areas from which to generate intrastate supports for high-cost companies, the only feasible response to the shifting of costs from the interstate jurisdiction may be to recover those costs from rural ratepayers, in contravention of the intention of the 1996 Act.
11 See, e.g., Comments of National Telephone Cooperative Association; Comments of John Staurulakis, Inc; Comments of the Western Alliance; Comments of the United States Telephone Association. 12 While efficiency is an important goal, that goal already is served, for most of the Alliance's members, by the oversight exercised by the RUS/REA program administrators, who underwrite only prudent investments that will benefit ratepayers. For companies that are not RUS borrowers, state commissions have the authority at any time to perform audits and require imprudent investments to be recovered from telephone company owners rather than ratepayers; and the FCC, of course, is free to undertake similar audit programs, for interstate investment, at any time. There is no need to enforce efficiency by withholding universal service supports, thereby increasing local rates in violation of the plain intent of Congress.
13 The Congress was, of course, aware of the 1995 Rulemaking and its proxy and competitive bidding proposals when it drafted the 1996 Act. These proposals, and their stark inconsistency with the purposes of Section 254, are the apparent source of the Conference Committee's cautionary statement that "[t]he conferees do not view the existing proceeding under Common Carrier Docket 80-286 . . . as an appropriate foundation on which to base the proceeding required by new section 254(a)." Joint Explanatory Statement of the Committee of Conference, House of Representatives Report No. 104-458 at 131 (1996). 14 1996 Act, supra at [[section]] 102(a).
15 Id.
16 The Western Rural Telephone Association (WRTA) is made up exclusively of RUS borrowers.
17 For the dire results of insolvency in a federal fund, one need look no farther than the federally-insured Savings & Loan industry. In that industry, misguided changes in the regulatory framework accelerated the demise of hundreds of once-solvent institutions, effectively bankrupting the fund created to insure the deposits held by those institutions. The result was the largest taxpayer bailout in history. A similar scenario can be imagined in the rural telephone industry, if precipitous reductions are made to USF, DEM and long-term support without regard to the impact of those reductions on existing loan obligations.
18 Id. at [[section]] 254(b)(5).
19 The rural carriers' obligations concerning future investment include the requirements of the state telecommunications modernization plans adopted by the Rural Utilities Service, which call for subscriber access to conference calling, high-speed data and other modern network capabilities.
20 "The guiding principle has been that the Constitution protects utilities from being limited to a charge for their property serving the public which is so `unjust' as to be confiscatory." Duquesne Light Co. v. Barasch, 488 U.S. 299, 307 (1989); see also Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944); Public Service Comm'n of Montana v. Great Northern Utilities Co., 289 U.S. 130, 135 (1933); Reagan v. Farmers' Loan & Trust Co., 154 U.S. 362 (1894); Stone v. Farmers' Loan & Trust Co., 116 U.S. 307, 331 (1886).
21 NPRM [[paragraph]] 14; 1996 Act, supra at [[section]] 254(b)(2).
22 Inclusion of ISDN-type functionality in universal service also is consistent with the Rural Electrification Loan Restructuring Act of 1993 ("RELRA"), which calls for state telecommunications modernization plans incorporating, inter alia, subscriber access to conference calling, video image and high-speed data capability. ISDN-type capabilities are the least-cost approach to offering these capabilities in the near future.
23 1996 Act, supra at [[section]] 254(h).
24 NPRM at [[paragraph]][[paragraph]] 127-131.